New HOEPA Rule

The following is an article reprinted with permission from the upcoming Winter 2010 edition of The WWR Letter: 

New HOEPA Rule

By: David A. Wolfe, Associate

In 1994, Congress enacted the Home Ownership and Equity Protection Act (“HOEPA”), responding to allegations of abusive lending practices in the home-equity lending market. HOEPA applies to closed-end loans on owner-occupied primary residences and non-purchase money transactions, and requires creditors to disclose and comply with limitations in home-equity loan rates and fees.

The Federal Reserve System recently issued significant new mortgage rules that took effect on October 1, 2009. For a newly defined category of higher-priced mortgage loans, the new rule adds protections and enhances existing protections for HOEPA loans, the strongest of which are aimed at curbing questionable lending practices in the subprime mortgage market. However, the definition excludes home equity lines of credit (“HELOCs”), reverse mortgages, construction-only loans and bridge loans. As the definition excludes HELOCs, lenders are prohibited from structuring closed-end transactions as a HELOC where there is no reasonable expectation that repeat transactions will occur.

Under HOEPA, a mortgage is defined as a “High Cost Loan” if it includes certain fees and interest rates that exceed a defined threshold. Covered loans include:

 A first lien loan where the annual percentage rate (“APR”) exceeds the rates on comparable Treasury securities by more than eight percentage points;

 A junior lien loan were the APR exceeds the rates on comparable Treasury securities by more than ten percentage points;

 The total fees and points paid by the borrower exceed eight percent of the total loan amount. 

The APR and fee-based triggers include amounts paid at closing for optional credit life, accident, health or loss of income insurance and other credit protection products purchased in connection with the loan transaction.

Where a loan exceeds these thresholds, a lender must disclose to the borrower all pertinent loan terms and any change in terms, at least three days prior to closing. 

In addition to the disclosure requirements, the new rules prohibit the following practices:

 Balloon payments on loans having a term of less than five years;

 Negative amortization payments and capitalized unpaid interest;

 Pre-paid payments.  Loan terms may not include more than two payments that are consolidated and paid in advance from the loan proceeds provided to the borrower;

 Most prepayment penalties;

 Due-on-demand clauses.  Exceptions include fraud by the borrower in connection with the loan or other defined default;

 Default interest rates that exceeds the rate in effect prior to default;

Lenders are also prohibited from approving loans based on the property value without regard to the borrower’s ability to repay the loan, requiring lenders to confirm borrowers’ repayment ability by examining current and reasonably expected income, employment, assets, current obligations and mortgage-related obligations, including property taxes and insurance. The rule does include lender safe harbor practices, permitting lenders to use reasonably reliable evidence of employment, such as information on a W-2 Form, tax returns, payroll receipts and other information from the borrower or borrower’s employer. 

HOEPA coverage is based not only on the loan interest rate, but also on points and fees charged by the lender. The effect of these changes may be that more loans exceed the HOEPA thresholds, subjecting many to additional disclosure requirements and restrictions. Additionally, more loans will be covered under state-specific predatory lending laws. 

David A. Wolfe is an Associate in the Bankruptcy and Legal Action Recovery departments of the Detroit office. He can be reached at (248) 362-6142 or dwolfe@weltman.com.

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